Ascott Residence Trust - UOB Kay Hian 2019-07-18: Enlarged Scale Strengthens Capacity To Generate Growth

ASCOTT RESIDENCE TRUST (SGX:A68U)

Ascott Residence Trust - Enlarged Scale Strengthens Capacity To Generate Growth

The merger of ASCOTT RESIDENCE TRUST (SGX:A68U) and ASCENDAS HOSPITALITY TRUST (SGX:Q1P) creates Asia Pacific’s largest hospitality trust. Ascott Residence Trust’s total assets will expand by 33% to S$7.6b with the addition of 14 hotels in Asia Pacific. The transaction provides DPU accretion of 2.5% and enhances debt headroom by 25% to S$1b. Ascott Residence Trust is also on course for inclusion into the FTSE EPRA NAREIT Developed Index.
Organically, Ascott Residence Trust continues to create value by recycling capital and pursuring asset enhancement and development projects. Maintain BUY. Target price: S$1.54.

The merger of ASCOTT RESIDENCE TRUST (SGX:A68U) and ASCENDAS HOSPITALITY TRUST (SGX:Q1P) will create Asia Pacific’s largest hospitality trust with combined assets of S$7.6b. Ascott Residence Trust’s total assets will expand by 33% with the addition of 14 quality hotels in Asia Pacific. Ascott Residence Trust’s Asia Pacific presence will expand by 11% and account for 71% of portfolio valuation. The transaction is expected to be yield-accretive (boosting 2018 pro-forma DPU by 2.5%).
The acquisition also enlarges Ascott Residence Trust’s capacity to acquire more quality assets and take on more development/conversion projects. Post-merger, Ascott Residence Trust’s debt headroom will increase by 25% to S$1b. With enhanced liquidity and concentration in developed markets, Ascott Residence Trust is on course for inclusion into the FTSE EPRA NAREIT Developed Index.

Ascott Residence Trust has completed refurbishments for Ascott Makati, Citadines Arnulfpark Munich, Citadines Trocadéro Paris, Somerset Grand Hanoi and Sheraton Tribeca New York Hotel. Management expects higher ADRs for Somerset Grand Citra Jakarta (renovation of 84 apartment units) and Element New York Times Square West (renovation of apartment units, lobby and public area) when their refurbishments are completed in 2Q19.
Ascott Residence Trust typically benefits from a double-digit uplift in ADRs post asset enhancement initiatives (AEI).

Ascott Residence Trust acquired a 60-year leasehold prime site in Singapore for S$62.4m in Sep 18. The site will be developed into a co-living property with 324 units in research and innovation hub. The property, named lyf one-north, targets the millennial segment. There are 400 companies and 800 start-ups located in the vicinity. A tender for the main contract is in progress.
The project is scheduled for completion in 2021. Management’s estimated yield-on-cost for this development at 6%.

Ascott Residence Trust has proposed to acquire Ascendas Hospitality Trust for S$1,235.4m, or S$1.0868 per Ascendas Hospitality Trust stapled unit, comprising 5% in cash (S$0.0543 per Ascendas Hospitality Trust stapled unit) and 95% in new Ascott Residence Trust stapled units. Ascendas Hospitality Trust shareholders will get 0.7942 new Ascott Residence Trust stapled unit for each Ascendas Hospitality Trust stapled unit.
The exchange ratio of 0.836x for the share swap is based on their respective NAV/share for Ascendas Hospitality Trust (S$1.02 as at Mar 19) and Ascott Residence Trust (S$1.22 as at Dec 18). The offer price of S$1.0868 per Ascendas Hospitality Trust stapled unit is based on Ascott Residence Trust's share price of S$1.30.

Ascott Residence Trust’s total assets will grow by 33%. The enlarged entity will be 1.6x the size of Regal REIT (ranked second), and 2.5x the size of CDL HOSPITALITY TRUSTS (SGX:J85) (ranked 6th). The acquisition adds 14 quality hotels in Asia Pacific (Singapore: 1, South Korea: 2, Australia: 6, Japan: 5), creating an enlarged portfolio of 88 properties with more than 16,000 units in 39 cities and 15 countries across Asia Pacific, Europe and the US.
It will also further diversify Ascott Residence Trust’s global portfolio with forays into new gateway cities – Brisbane and Seoul.

The merged entity will see its presence in Asia Pacific strengthen by 11% to account for 71% of portfolio valuation (where demand for business and leisure travel is robust). Freehold properties will also expand by 8% to account for 61% of portfolio valuation. No country will contribute more than 20% of gross profit for pro-forma 2018.
The merged entity will continue to have a balanced mix of stable and growth income (gross profit breakdown of 54% by management contracts, 36% by master lease, and 10% by management contracts with minimum guaranteed income).

With a larger asset base and pro-forma gearing of 36.9%, debt headroom is expected to grow to S$1.0b for the merged entity with a 45% gearing limit (previously S$0.8b). Debt headroom is much higher at S$1.8b if leverage limit is lifted to 50%, which is currently being considered under the MAS’ industry consultation.

Management expects the acquisition to be DPU accretive (boosting 2018 pro-forma DPU by 2.5% to 7.34 S cents) and NAV neutral (unchanged at S$1.22/share).

The combined entity will see its free float increase by 50% to S$2.4b (exceeding index inclusion threshold of S$1.7b) and EBITDA derived from developed markets expand to 82% (previously: 75%) on a pro-forma basis for 2018. This will further enhance trading liquidity, potentially leading to a positive re-rating of Ascott Residence Trust’s unit price.

Peihao LOKE UOB Kay Hian Research | Jonathan KOH CFA UOB Kay Hian | https://research.uobkayhian.com/ 2019-07-18

SGX Stock Analyst Report BUY MAINTAIN BUY 1.54 UP 1.460